Often, buying a new home does not seem like a possibility since you have not yet sold your current home. But there is a solution — a bridge loan.
A bridge loan is a short-term financing option that lets you buy your new home without waiting for the previous one to sell. Some other names for a bridge loan are bridge financing, swing loan, interim financing, and gap financing.
Since a bridge loan is short-term, you have to repay it in six months to three years. The fees vary from one lender to another, and your current home serves as collateral for the bridge loan.
Suppose you need a bridge loan because you are eyeing a real estate deal that you suspect will not stay on the market for long. What is the process for a bridge loan? How long is the typical timeline for a bridge loan? Below, we discuss it in detail.
How Does a Bridge Loan Work?
A bridge loan acts like a “bridge,” allowing you to buy your new home without getting the money from the sale of your existing property. In this respect, the maximum loan amount is typically well over half of the total value of the home you wish to purchase and your current home.
However, the percentage can differ, depending on the lender you have chosen.
Once you have gotten a bridge loan, you can use it as a down payment on the house you want to buy. You have to repay the loans in a year or less. In most cases, people pay off the bridge loan once they have sold their original home.
When to Get a Bridge Loan
You should apply for a bridge loan if:
- You are eyeing your dream home and want to purchase it before someone else does.
- You are confident that your existing home will sell promptly.
- You want to move into your new home before you have sold your old one.
- You can’t make a down payment on your new home unless you have sold your current home.
When Not to Get a Bridge Loan
Although a bridge loan can help get you your dream home, it is not always the right choice for you. Here are some situations in which you should not opt for a bridge loan:
- There is less than 20% equity currently in your home.
- You are not confident that your current home will sell on time, putting you in a situation where you have to pay a bridge loan and two mortgages.
If you want to purchase a second home, it is possible to get a bridge loan but not always advised unless you are sure that you can make multiple payments a month.
Timeline for a Bridge Loan
The funding timeframe and approval process differ from one lender to another, depending on the type of property used as collateral and the lender’s standard requirements.
Here is how the typical bridge loan timeline and mortgage process works:
- Application: You apply for a bridge loan using the equity in your home. After your first house sells, the money pays the rest of your bridge loan and the first home’s mortgage, which only leaves you with the second mortgage on your new home.
- Approval and Funding: Normally, lenders take 30 to 45 days to approve and fund your loan. If you are taking a loan from a hard lender, the timeframe is shorter. Meanwhile, credit unions and banks take longer to approve your loan and provide funding.
- Repayment: Most bridge loans have a 12-month or shorter repayment term. Once you sell your first house, you can use the funds to repay the loan completely. Although different bridge loans have varying structures, most come with a balloon payment, which means you have to pay the total amount of the loan by a particular date.
Alternatives to Bridge Loans
In specific cases, you may need a bridge loan to buy your dream home. However, these loans have high origination fees, high interest rates, and require a certain amount of equity in your current home.
Here are some alternatives to bridge loans:
Stocks are a great way to put a down payment on your new home without selling the previous one. You can use stocks in two ways:
- Sell them
- Get a loan using them as collateral
Selling your stocks is pretty straightforward. However, it would be better to talk to a financial advisor to determine which stocks you should sell first.
Meanwhile, if you want to get a loan against your stocks, the process is a bit complicated, and it is best to get a professional involved. Simply put, you can borrow money against your portfolio’s value at a variable interest rate using your assets as collateral.
Roth IRA or 401k
You can also use a certain amount from your Roth IRA or 401k to fund the down payment. Consider borrowing $50,000 or half of your retirement account balance, whichever is a smaller amount. Even though you will pay interest on this, the amount will go to your down payment.
Home Equity Line of Credit
A home equity line of credit allows you to borrow money from a lender up to a certain amount and pay it back along with interest. It works quite like a credit card. As you make your repayments, your available credit amount is replenished.
The draw period for HELOCs usually is ten years, and during this time, you can borrow as much as the lender allows. You can even borrow more money if you need to. Once the draw period ends, the 20-year repayment period starts.
You can use a HELOC to make a down payment on your new home.
A bridge loan can be a step in the right direction for many people, such as those getting a good deal on a house or wanting to settle in their new place before selling the previous one.
A sale-leaseback solution may offer a handy plan as well, allowing you to get cash for your home’s equity without moving immediately. Basically, you sell your home, stay in it as a renter, and use the money to buy a new home.
Often, buying a new home does not seem like a possibility since you have not yet sold your current home. But there is a solution — a bridge loan. If you are still unsure of alternative options to securing this specific loan, or what the timeline of a bridge loan is like, consult a financial advisor to discuss your options.